Inadequate funding for science and research could cost President Bush--and the economy

When George W. Bush introduced his $1.96 trillion budget in February, he paid homage to the new economy by telling Congress that American technology is "revolutionizing the world."

In public comments since then--and in the budget he subsequently sent to Capitol Hill--Bush has demonstrated a desire to bolster this sector of the economy. He called for doubling the budget of the National Institutes of Health and urged making the research and development tax credit permanent. He supports revamping the Export Administration Act so that more computers can be sold abroad, and his budget anticipates no new taxes on e-commerce.

So far, so good. But to be a true friend to the new economy, Bush needs to go much further, especially in his budget proposals. This has less to do with the dot-com shakeout and the current rough patch the high tech industry is enduring than with recent political history. For one thing, the president is a Bush, which in the minds of many technology executives is enough to make him suspect. There's a history here. In 1990 tech leaders were appalled when word went around--and even made its way into print--that Michael Boskin, chairman of the Council of Economic Advisers in the first Bush administration, blurted out at an economic conference: "Potato chips, semiconductor chips, what is the difference? They are all chips. A hundred dollars' worth of one or a hundred dollars' worth of the other is still a hundred dollars."

Boskin insists he never said any such thing, but the apocryphal anecdote helps explain tech's suspicion of that administration. It recalled Reagan/Bush Budget Director Richard Darman's bizarre ruminations during the furor over Japan's dumping of semiconductors. "Why do we want a semiconductor industry?" Darman asked. "What's wrong with dumping? It is a gift to chip users because they get cheap chips. If our guys can't hack it, let them go."

That's the baggage Bush carries. Clearly, it wasn't just Bill Clinton's libertine social conventions that made Clinton Democrats out of many of Silicon Valley's live-and-let-live entrepreneurs.

Certainly Bush has gone to pains in his first year in office to meet with new economy players. But in his budget priorities, Bush demonstrated a rather conventional view of what government can do to help. Part of this is consistent with a Republican mind-set holding that the best assistance Washington can give the private sector is often to just get out of the way. Partly, it is a reaction against the now discredited notion pushed by some Democrats that the government has a role in picking winners and losers. And some of it stems from a timidity about new spending ideas because Bush's tax cut requires holding the line on spending--and retaining existing government revenues.

Those reasons all make sense. But this is a president who went six months without bothering to fill the post of White House science and technology adviser, and there is a sneaking suspicion that the West Wing is low on expertise about what the new economy needs. At Forbes ASAP, we like to be helpful. So here are some ideas--there are others--that enjoy support from congressional futurists of both political parties:

Expand the R&D tax credit. First passed in 1981, the research and development tax credit has been extended 10 times (although Congress and the Clinton administration let it lapse between 1995 and 1996) but never made permanent. Bush, to his credit, sent Congress a budget that calculated doing just that. But in one of the many gimmicks it used to make the tax cut more palatable to skeptics, Congress did not extend the R&D tax credit beyond 2004.

That may be just as well in the long run because the credit needs to be modernized before becoming part of the permanent tax code. The way it reads now, corporations can deduct up to 20% off their annual corporate income tax bill, but under conditions that are manifestly unfair to startups, especially (and perversely) those doing the most innovative research. One of those conditions is a complicated, two-tiered formula that allows companies to take tax credits based on the ratio of their R&D budget to their sales. This is generally of little help to biotech startups, which typically invest tens of millions in research before they realize a nickel in revenues (let alone profits). Over the years, Congress has updated the tax credit, but the system still favors companies that were around in 1984 and discriminates against high-concept tech firms that don't move product--and don't have a baseline to which they can compare their R&D budgets.

Make the tax code more tech-friendly. Lowering capital gains taxes spurs venture capital activity. The top rate is 20% and is scheduled to drop to 18% in 2006. Why wait? And why not give investments in new enterprises an even more favorable rate? While they're at it, the Bushies should update the rules for depreciation. Semiconductor manufacturing equipment can be depreciated over five years--but the equipment is often obsolete after three. This administration should also rewrite the odious provisions of the Alternative Minimum Tax. That law requires employees who exercise stock options to pay taxes on the difference between the public price of the stock and the option price. This is true even if the employee never pocketed a penny, the stock became worthless, and the company went belly-up.

Bolster (nonmilitary) science spending. Bush proposed increasing the National Science Foundation (NSF) budget by 1%. Since the inflation rate is at 3.6%, that "increase" constitutes a cut in real dollars. Democratic Senator Barbara Mikulski of Maryland has proposed doubling the NSF budget in four or five years. Her unlikely ally, former speaker Newt Gingrich, termed Bush's paltry proposed increase of $56 million for fiscal year 2002 "a tragic mistake."

Allan Bromley, White House science adviser for the first President Bush, added that stingy increases in scientific research won't preserve the current federal budget surpluses but actually threaten them by restricting economic growth. "No science, no surplus," Bromley asserts. "It's that simple."

Increase funds for IT research. President Clinton's Informational and Technology Advisory Committee, chaired by Sun Microsystems cofounder Bill Joy, recommended that in five years the government should be spending an additional $1 billion on IT research annually. But Bush asked Congress for only $40 million in additional funds this year, bringing the total to $1.97 billion. That is a lot of money, but the government would save a great deal more than that if it could streamline its own outdated service programs, starting with Medicare. "Using IT to streamline much of the information processes in the health care system could save tens of billions of dollars a year," says Robert D. Atkinson, the respected director of the Technology & New Economy Project at the Progressive Policy Institute (PPI), a centrist Democratic think tank.

Hire a government technology czar. Even before the FBI and its 15-year-old computer system misplaced 3,000 documents in the Timothy McVeigh case, the most important field investigation in its history, the PPI recommended that the executive branch have a chief information officer--and a $500 million annual budget--to make digital government a reality. The techno-chief would do everything from authorize which computers and software to buy to making sure the federal agencies use a comprehensible email system. The suggestion was embraced by both Connecticut Democratic Senator Joe Lieberman and Bush, although $500 million proved to be a little steep for the Austin crowd; Bush agreed to only a $100 million budget. But in its actual budget, the administration requested only $20 million--and scotched the idea of a CIO.

Senators Lieberman and Conrad Burns, a Montana Republican, are sponsoring a measure to resuscitate the idea. Congress could do the American people a favor by passing such a bill.

Nationalize the electricity grid. The president's energy plan calls for taking America's patchwork collection of nine regional electric power grids and building a coherent national system. But Bush's budget, admittedly prepared before the energy plan was undertaken, earmarks no funds for it. Columbia University professor Roger Anderson estimates $50 billion is needed--and it's time to start appropriating the money.

All of these measures together would not assure a smooth high tech future for America's new economy--or guarantee Bush political success. They would, however, make him a man of his word and a friend of an industry he has extolled. "This administration has great confidence in the future of the high technology industry," Bush told high tech CEOs this past spring as technology stocks were sinking. "You've changed the way we work and communicate, and you've changed the way we learn. You've done for American economic leadership in the 21st century what heavy industry did in the 20th century. You've done so much for your country, it's time for your country to do something for you."

Words to live by.

Carl M. Cannon is the White House correspondent for the National Journal. His "Letter from Washington" appears regularly in Forbes ASAP.